Aptiv PLC (APTV) — Q4 2018 Earnings Call Transcript

Thank you, Amy. Good morning and thank you to everyone for joining Aptiv’s fourth quarter 2018 earnings conference call. To follow along with today’s presentation, our slides can be found at ir.aptiv.com, and consistent with prior calls, today’s review of our actual and forecasted financials exclude restructuring and other special items and will address the continuing operations of Aptiv. The reconciliation between GAAP and non-GAAP measures for both our fourth quarter financials, as well as our outlook for the first quarter and full year are included at the back of today’s presentation and in the earnings press release. Now turning to slide 2 for a disclosure on forward-looking statements, which reflects Aptiv’s current view of future financial performance, which may be materially different from our actual performance for reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Kevin Clark, Aptiv’s President and CEO; and Joe Massaro, CFO and Senior Vice President. Kevin will provide a strategic update on the business and then Joe will cover the financial results on our outlook for 2019 in more detail. With that, I would like to turn the call over to Kevin Clark.

Thanks Elena and good morning everyone. I'm going to begin by providing an overview of the fourth quarter and full year, highlight several of our key 2018 milestones and provide some perspective on how we’re thinking about end markets for 2019. Joe will then take you through our 2018 financial results as well as our more detailed outlook for 2019. I’m pleased to report a strong finish to 2018, a testament backed by visibility to drive sustained outperformance even in a challenging end market. Revenue, operating profit and earnings per share all finished above the guidance we provided in October. For the full year, revenue of $14.4 billion represents 10 points of growth over market, reinforcing the strength of our portfolio of advanced technologies aligned to the safe, green, and connected mega trends. The strength of our technology portfolio also resulted in record new business awards totaling $22 billion for the full year exceeding our prior year record of $19.3 billion. Our 2018 financial performance also validates the robustness of our business model that can deliver in any environment that’s positioned for solid, true cycle performance. As we kick off the New Year, we remain laser-focused on delivering value to our shareholders. Given the current macro and geopolitical environment, we believe it’s prudent to be balanced in our 2019 planning assumptions, which we’ll cover in more detail shortly. However, we are confident that the long-term fundamentals of our business remain intact and I’ve never been more confident and excited about our future, as Aptiv is perfectly positioned to capitalize on the trends driving Auto 2.0 and deliver sustainable revenue and earnings growth while continuing to invest in our future. Turning to slide 4, building a strong sustainable business that makes the world safer, greener, and more connected is the focus of our management team. We made significant progress executing on a number of strategic fronts in 2018. First, we had very strong revenue growth over market and record customer new business awards, giving us confidence in our revenue growth outlook, and reinforcing that we have the right software and computing systems integration capabilities required to help our customers adapt to higher levels of advanced safety, electrification, and connectivity. Second, our record cash flow generation and disciplined capital deployment reinforced our strategy for long-term shareholder value creation. We funded both organic and inorganic growth initiatives including additional capacity to support our strong backlog of Active Safety Business awards, investments to further develop our automated driving capabilities, smart vehicle architecture, and connected services, and the acquisition of KUM and Winchester Interconnect further establishing Aptiv as a market leader in engineered components. In addition, we repurchased $0.5 billion of stock, over half of which was in the fourth quarter, taking advantage of market disconnects over the course of the year. So in total, we returned over 700 million to shareholders through share repurchases and dividends. Moving to the far right of the slide, as always we remain focused on our cost structure constantly working to improve the competitiveness of our business model and lower our breakeven to increase the flexibility of our cost structure and be in a position to fund the incremental growth investments while delivering earnings and cash flow growth. While we’ve been on this journey for some time, our focus on continuous improvement means we’re never finished. Our DNA is wired to naturally focus on delivering material and manufacturing efficiency and also to reduce overhead costs. $50 million of overhead and stranded cost-related to the Powertrain spinoff were actually eliminated during 2018. Further, our engineering resources are critical to executing our pipeline of new business awards. Our continued focus on maximizing engineering efficiency and effectiveness with updated methodologies, reusable software platforms, and other tools allows us to expand our capabilities in software, artificial intelligence, machine learning, and systems engineering faster than we’ve grown on engineering spend. In summary, our continuous improvement mindset is helping us improve operational efficiency, while allowing us to meaningfully invest in our future. Turning to slide 5, you can see fourth quarter new business bookings totaled $6.5 billion, bringing the 2018 total to $22 billion, well above 2017's record of just over $19 billion. As I mentioned, these bookings are the direct result of our widening competitive moat and several advanced technologies across both advanced safety and user experience, and signal and power solutions. Beginning with active safety, where we won $3.9 billion of new customer awards, topping last year’s record of $3.7 billion. These awards include multiple scalable level 2 plus programs, leveraging our unique satellite architecture, active safety domain controller, and perception systems. Infotainment and user experience customer awards totaled $2.8 billion, driven in part by integrated tactic controller solutions, reinforcing our leadership position in central compute. In engineered components, we booked $6.5 billion of new customer awards, including $1 billion in high voltage connectors, bringing 2018 high voltage electrification awards to $2 billion, double the amount from the prior year. Our continued momentum in new business bookings validates our ability to leverage the unique brain and nervous system, or the software and hardware foundation that we’ve created, which enables new features and functions while optimizing the total system cost of the vehicle. Turning to segment highlights in advanced safety and user experience on slide 6, sales for the fourth quarter were up 12%, that’s 14 points over market. Continued strong consumer demand for active safety and infotainment solutions drove revenue growth of 54% and 8% respectively. As the need for more complex software development and systems integration expertise increases, our unique ability to offer highly functional optimized solutions has driven several of our 2018 new business awards, including six new central compute awards, across multiple domains including active safety, infotainment, and body, chassis, and propulsion, bringing our total customer awards to 11. The most recent example shown here is our Conquest win with PSA for scalable active safety, leveraging our satellite architecture solution which is being deployed across multiple vehicle maker models and represents our 7th such award in active safety. Finally, operating margins expanded 170 basis points for the year, excluding the impact of mobility investments, demonstrating the benefits of our competitive positioning and cost structure. Turning to slide 7, our signal and power solutions segment is focused on next-generation vehicle architectures, including high-speed data and high-power electrical distribution to enable advanced technologies that will shape the future of mobility. For the quarter, sales increased 6%, that’s nine points over market despite the weakening macros, driven by over 50% sales growth for high voltage electrification products and strong double-digit growth for engineered components. Underscoring our industry-leading position in vehicle architecture, we were recently awarded the high voltage electrical architecture on the Jeep Grand Cherokee. This high-value, high-volume award validates the increasing need for optimized high voltage architecture across a full range of vehicle types. In 2018, high voltage electrification revenues approached $300 million, that’s up over 60% year-over-year, making it one of our fastest growing and most profitable product lines. Based on the value of our new business bookings, this product line should reach over $1 billion of revenues in 2022, representing a 40% compounded growth rate over that period. In summary, given the breadth and depth of our portfolio in both segments, we are perfectly positioned to benefit from the convergence of Auto 2.0 trends, and we’re confident in our ability to continue to grow revenues in excess of the underlying markets. Given the more challenging macro landscape heading into 2019, on slide 8, I’d like to provide some context for the key assumptions that underpin our vehicle production outlook for the year. As we look ahead to 2019, we expect to see continued softening of vehicle production around the world. At a global level, we expect vehicle production to be down 2.5% for the full year and down 4% in the first half. From a regional perspective, I’ll start with China as I know it’s top of mind for many of you. We expect vehicle production to decline 11% in the first quarter and 8% for the full year. And while we will continue to experience strong revenue growth over market in this region, driven by double-digit growth in our key product areas including active safety, infotainment, and high voltage electrification, we’re preparing for structurally lower industry volumes going forward. As a result, we’re being prudent from a cost structure perspective. We reduced salary costs in this region by almost 10%. Turning to the other regions, we expect low single-digit production declines in North America and Europe. However, similar to China, we also expect revenues to grow in excess of vehicle production, given our new launch cadence and market share gains. Finally, as Joe will outline in more detail shortly, we expect our portfolio of safe, green and connected technologies and balanced regional customer and platform mix to more than offset the industry macros contributing to strong growth over market once again in 2019. Before I turn it over to Joe to go through the numbers, I’d just like to highlight another great year at CES. As we’ve done in the past, we provided automated rides on the streets of Las Vegas, accumulating nearly 10,000 smiles during the week of CES alone. While a number of our customers, investors, and partners took advantage of our vehicles to transport them to and from their destinations in and around the strip, downtown, or to and from the airport, we also supported our normal operations for the general public. Since its launch earlier last year, we’ve conducted over 30,000 rides on the network, receiving a near-perfect 4.9 star rating out of five, underscoring the quality of the ride experience. Further, we gave customers as well as investors a look at the advanced software and hardware architectures that are enabling the safe, green, and connected solutions our customers are demanding. In total, we had over 100 customer meetings and hosted several senior executive customer VIP visits which underscored the increasingly strategic growth Aptiv plays in delivering fully integrated and optimized vehicle architectures. Our technology display showcased our value add across the full vehicle stack from perception sensors to cloud, with unparalleled strength in advanced safety, in-cabin experience, data services, and our cabinet solutions. Our customers appreciate that given the architectural rights today, it is critical to delivering the feature-rich, highly automated vehicles they need in the future. As a result, we position Aptiv as the only integrated provider of both the brain and the nervous system of the vehicle, capable of conceiving, classifying, and delivering the advanced architectures that make the future of mobility real. So with that, I’ll hand the call over to Joe to take us through the fourth quarter and full-year results and review our outlook for 2019.

Thanks Kevin and good morning everyone. Starting with the recap of the fourth quarter financials on slide 10, revenue, operating income, and earnings per share came in at the upper end of the guidance we gave back in October. We saw strong sales growth in the quarter, revenue of $3.6 billion, up 8%, or 11 points of our vehicle production, reflecting the continued ramp of new program launches in both advanced safety and user experience, and signal and power solutions. EBITDA and operating income of $600 million and $430 million reflected the benefits of strong volume growth, partially offset by FX and commodity headwinds and investments in future growth. Earnings per share $1.34, up 5%, $0.13 above the midpoint of our guidance, a combination of higher operating income and a slightly lower share count contributed roughly half of the EPS increase, while a lower-than-expected tax rate contributed $0.07 of upside in the quarter. Lastly, operating cash flow was $750 million, reflecting earnings growth and favorable working capital performance. Turning to slide 11, the continued strong launch volume we’ve had over the past year drove double-digit growth over market, which helped to offset a decline in vehicle production, unfavorable price, and the FX commodity headwinds. From a retail perspective, we saw strong growth over the market in all major regions of the world, despite weakness in Europe and China markets. North America sales were up 16 points over market, benefiting from multiple new platform launches in both segments and the addition of Winchester Interconnect. Europe saw 8 points of growth over market driven by continued active safety and infotainment ramp-ups, and China grew 9 points over market, partially offsetting lower-than-expected production volumes. Slide 12 looks at our operating income performance year-over-year. Operating income of $430 million was down 4%, up 3% when adjusted for FX and commodities. Tariffs in the quarter were approximately $5 million. Our operational performance continues to fund investments in our key growth areas including high voltage electrification, active safety, infotainment, and mobility. Margins adjusted for FX and commodities were 12.5%, reflecting volume conversion on strong sales growth, offsetting unfavorable price and the impact of higher mobility investment spending. Strong operating performance yielded higher earnings per share in the quarter, as shown in the walk on slide 13. Earnings per share of $1.34 was up 5% year-over-year, including a $0.12 headwind from FX and commodities in the quarter, offset by strong volume conversion, operational performance, favorable tax, and other income. For the year, our tax rate was 14.3%. 2019 is estimated in the range of 14% to 15%, and we believe this range is an improvement from our prior long-term guidance of 15% to 16% and is sustainable, driven by our recent footprint and portfolio actions. Moving to the statements on the next slide, for the quarter, advanced safety and user experience revenues grew 12%, driven by new launch volumes and continued strong growth in active safety up 54%, and infotainment and user experience up 8%. Operating income grew 10% before the impact of higher mobility investments, driven by the accretive benefit of volume growth as well as improved material and manufacturing performance. Our mobility investments for the full year totaled roughly $160 million, funding the development of our next-generation automated driving software which will be launched with our new vehicle platform early this year. This represented an increase of $100 million year-over-year, consistent with our previous outlook, and for 2019 we continue to expect mobility investments of approximately $180 million. In summary, another strong year of revenue and operating leverage in the advanced safety and user experience segment. Turning to signal and power solutions on the next slide; for the quarter, revenues were up 6% or 9 points over market, driven by new program launches in North America, robust commercial vehicle sales, and strong growth in high voltage electrification despite lower vehicle production globally. Operating income adjusted for the dilutive impact of FX and commodities grew 4%. As we have discussed, the margin rate in 2018 was unfavorably impacted by FX and commodities headwinds related to both the translational and transactional effects of the weaker Euro and Chinese RMB in the back half of the year. We expect these headwinds to continue in the first half of 2019 and have been contemplated in our outlook for Q1, which I’ll cover in more detail in a moment. Now turning to slide 16, for a recap of the full-year financials; revenue, operating income, earnings, and cash flow all came in above the midpoint of guidance we provided back in February 2018. Despite macro challenges in the second half, including lower global vehicle production and unfavorable FX and commodities. That’s a testament to the robustness of our business model and reinforces the progress we’ve made on both our portfolio positioning as well as operational efficiency to build a more sustainable business and prove our true side of resiliency. Turning to the next slide, the core tenets of our long-term financial framework remain unchanged and we expect comparable performance again in 2019, before the impact of tariffs, which I’ll address in more detail shortly. Revenue and earnings growth are being driven by our portfolio of relevant technologies and their ability to sustain above market growth. Our flexible and efficient workforce, along with our relentless focus on operating performance, continually improves our cost structure. This enables us to fund investments in key growth areas as well as continue our track record of sustainable earnings growth. The operating income walk on the right lays out the puts and takes for the year. Volume from record 2018 launches will continue in the next year, more than offsetting lower vehicle production as Kevin referenced earlier. Our annual pricing headwinds are 2% in line with our historical run rate. Based on current estimates, we expect to see an unfavorable year-over-year impact from FX and commodities. Our material and manufacturing productivity and our cost reduction actions will more than offset higher engineering investments and inflation. Lastly, we’re addressing the US-China tariffs directly, with our mitigation strategies already underway, we now expect tariff costs to be roughly $69 million in 2019. As a result of our long-running focus on cost and productivity improvements, we’re confident we can continue to grow earnings at the forecasted volume levels. Turning to the next slide for 2019 guidance; for the year, we expect revenue to be in the range of $14.6 billion to $15 billion, up 6% at the midpoint, despite global vehicle production down 2.5%, with growth over market of over 8%. Looking at the segment and starting with advanced safety and user experience, we expect near double-digit revenue growth in 2019 driven by continued strength in active safety of 45%. As we previewed last year, infotainment and user experience revenues will grow in mid-single digit, wrapping strong launch volumes in 2018, as we prepare to launch our next-gen Integrated Cockpit Controller in 2020. Additionally, we’ll see the roll-off of the display audio product line in the first half of 2019 impacting year-over-year growth. In signal and power solutions, we expect mid-single digit revenue growth again in 2019, driven by continued growth across the segment and the accretive benefit of recent acquisitions. Operating income is expected to be $1.82 billion as a midpoint before the impact of tariffs, and as a result we expect earnings per share in the range of $5.45 to $5.65 per share excluding tariffs, up 6% at the midpoint with share count flat year-over-year, and cash flow of $1.7 billion up mid-single digits over 2018. As it relates to tariffs, we are looking at those as discrete items from a mitigation perspective, and are in the process of executing a number of actions that will reduce tariff exposure going into 2020. As a result, we estimate our US-China tariff exposure to be approximately $60 million in 2019, reflecting the work that’s been done to reduce the $75 million exposure we previously communicated. Tariffs will primarily impact signal and power solutions approximately $50 million of the $60, with the remainder in advanced safety and user experience. For the first quarter, revenue is expected in the range of $3.4 billion to $3.5 billion, up 1% at the midpoint or 5 points of growth over market, given our outlook for global vehicle production down 4%, with China production down 11% in the quarter. Operating income and EPS before tariffs are expected to be $345 million and $1.03 at the midpoint respectively, reflecting the impact of a slowdown in China and the FX and commodity headwinds I mentioned previously, as well as higher engineering and mobility spend. Tariffs for the quarter are estimated to be $10 million. In summary for 2019, despite the reduction in vehicle production, with our portfolio of relevant technologies, we will continue to outgrow the market and we will continue to invest in the future growth of our key product lines. As Kevin mentioned, we do this for our relentless focus on improving our cost structure, positioning Aptiv to continue to grow earnings and cash flow even in a down production environment. Turning to slide 19, and as Kevin highlighted earlier, in 2018 we again executed on our capital deployment strategy to create value for shareholders. We invested in the business to support our strong bookings growth and fast-growing product lines such as active safety. We invested $1.2 billion in accretive bolt-on acquisitions, KUM and Winchester, which expanded the geographic and end market diversification of our signal and power solutions business. Lastly, we returned over $700 million to shareholders through share repurchases and dividends in 2018, bringing total cash to shareholders to over $6 billion since our IPO. Looking forward, we’ll continue to maintain a consistent and well-balanced approach to capital allocation aligned with our strategic framework, focusing on reinvesting in our business both organically and inorganically while maintaining our investment-grade credit rating and paying a competitive dividend. Our M&A strategy focuses on accretive bolt-ons that provide attractive end-market diversification as well as advanced technologies that accelerate speed to market and provide access to new markets. To the extent that we can take advantage of market disconnects, we’ll be opportunistic in our share buyback and return cash to shareholders. To this end, today we announced a new $2 billion share repurchase authorization, incremental to the roughly $500 million remaining on our current authorization. In summary, we believe our effective capital deployment is a major differentiator for Aptiv and an important lever for shareholder value generation. And with that I’d like to hand the call back to Kevin for his closing remarks.

Thanks Joe. Let me wrap up on slide 20 before opening up for Q&A. 2018 was a great first year for Aptiv, where we delivered on our financial commitment, revenue, operating income, earnings per share, and cash flow, even in a more challenging macro environment. Our performance underscores the journey we’ve been on to prove our true cycle performance by having the right portfolio of advanced technologies enabling the safe, green, and connected solutions that the customers are increasingly demanding. The right cost structure is driving earnings and cash flow growth while continuing to invest in our future and the right people and processes to deliver the innovation and execution inherent in our strategy. Looking ahead, the senior management team has never been more confident in our competitive position and excited about our future. Aptiv is perfectly positioned to continue capitalizing on the key global Auto 2.0 mega trends, driving increased vehicle content and market share gains. We’ve done this while improving our cost base which gives us great confidence in our outlook for 2019 and beyond. We remain laser-focused on delivering value to our shareholders today, building upon our strong track record of value-enhancing and balanced capital deployment. As a result, we have a more predictable and sustainable business model with robust downturn resiliency, better positioned to perform in any macro environment. With that, let’s open the line up for Q&A.

Regarding China, it looks like you guys expect to underperform the market in Q1, and then significantly outperform over the course of the year. Can you talk a little bit about what’s going on in Q1 and what’s going to turn that around in the next three quarters?

Dan, it’s Kevin, why don’t I start and Joe can certainly augment my response. Really when you look at China and our growth over the market in China in the first quarter, it comes down to specific OE mix and specific platform mix within OE. So there are a couple of OEs, but we’re seeing significant scheduled reductions during the first quarter and the net result of that is our revenue dropping below market. As we look at the go-forward schedules, Q3 and beyond, we actually see some of that activity leveling off, with two new launches and just three, more stabilization of both the production schedule on those particular platforms. So there are three or four OEs that we’re seeing fairly significant reductions in schedules for Q1.

Got it, and then just following up on that. Do you think some of this is related to inventory destocking in Q1, and I guess like are you counting on big launches in the balance of the year and kind of have you heard anything about delays in launches or anything like that?

I would say there are no major launches from a volume standpoint, continued strong growth in active safety vehicles, electrification, infotainment, user experience. But we experience that throughout quite clinically in 2017 and 2018, so that’s just a continuation. With respect to schedules for Q4 and Q1, certainly a significant portion of that is tied to inventory rebalancing or inventory reduction. As you know, visibility to inventory levels in China is less than perfect, but based on what we see, they are certainly coming down. But there is also a consumer demand aspect that’s taken place over the last two quarters. But having said that, as you look at Q2 through Q4, it’s not as though we’re betting on or planning on significant launch programs. And with respect to delays in that market, quite frankly, we haven’t seen any. So it’s really been volume schedules on existing platforms, principally passenger car platforms.

Maybe first a little bit of a clarification, if I look at slide 11 adjusted growth of 8%, it looks like the acquisitions are maybe in that revolving number. So, I was wondering if you could call out how much that added, and then also how you’re dealing with the acquisition in your 8% growth over market guidance for ’19?

Joe, there are smaller deals there, particularly KUM, as that was sort of a full-on integration, causing that to move things between plans. KUM’s actually got to pick up some of the volume that’s coming out of some of the production that’s coming out of China to deal with tariffs, so that’s one’s getting a little mixed, but Q4 call it about 1.5 and then 2018 call it about 2 points of growth coming from those two deals for our numbers.

Sorry, in ’18 or ’19, two points?

I’m sorry in ’19. About 1.5 in Q4 and 2 points in ’19.

And then just on the tariffs, sorry if I missed this, but what exactly are you assuming, is it tier one was through 10% for now going to 25%, do you assume it stays at 10%? And like the numbers you gave is that growth in fact before the mitigations you mentioned in your China deal?

Yes, so that’s right. So we’ve got $60 million and that’s the total exposure, okay? So it’s $10 million in Q1 and then at this point evenly throughout the last three quarters. The $10 in Q1 is at the lower rates through January and February, then stepping up to 25% in March, and we assume 25% for the balance of the year. We’ve left the full number in the guide at this point, we’ve got a number of remediation actions, but to some extent they will get out of our control when they take effect, right, as customer approval and those types of things. So at this point based on what we know in tariffs, I’d say that $60 million is the worst case and it’s in there. We made some progress over the course of Q4 remediating from the $75 million to $60 million. That was what I’ll call maybe some of the lower hanging fruit in the remediation plans where we could have multiple sources for the product, could source from another location, so you could make more sort of, I call it easier changes in the product flow. Those actions have taken place and those costs are now out for 2019.

So fair to say you have some ideas about how you can go to mitigate this, unclear whether they come through, but you’re not counting on them in your guide?

I would say Joe it’s more than ideal, as I mentioned we got a wholesome production out of China, we’re going to put it into Korea that process has started. But we got to get the lineup in Korea, then there’s obviously customer validation. So that’s really the issue with the timing. It’s not that we’ve got ideas; we’re not sure they’ll work. We’re in motion on things, but by the time they get approved by customers, we’re just not sure what the exact timing looks like, if that makes sense.

Operationally we are not assuming these go away. So the $75 million original estimate reduced to $60 million is the result of specific actions that Joe and the team have been driving to reduce the overall exposure, and we’re continuing to execute on a whole list of actions, supply chain manufacturing, and otherwise to reduce that impact. And as Joe said, some of those activities require customer validation. Customers, certainly in North America, seem to be very engaged, so we would expect to get support in those activities, but we don’t fully control it.

Wanted to ask you about your recent performance and the expected one in the context of your, sort of like longer term framework, the way it was communicated that you’re in the best of days a little while ago. So, in particular I think the framework on the revenue side used to call for, 4 to 6 points over market through 2020, 5 to 7 points over the market beyond that. It seems like in 2018 maybe you did 10% over market, are you still planning for 8% in 2019? Are we still within the framework or is there sort of like some upside there, and then similar type of question on the margin front but the other way around. I think that we had been looking 20 bps of expansion in the year initially, maybe 30 to 50 beyond that. I think that even excluding some of the macro headwinds, is it fair to say that either we haven’t seen as much expansion as you expected? Is it more expensive to essentially grow this business?

It’s Joe and Kevin can chime in as well. I think on the revenue side we’ve talked about it. We’re obviously running ahead of where we thought we’d be. Back in September of ’17 we see that continuing for 2019 obviously and as we move into mid-year, we’ll refresh the longer-term revenue outlook at our investor day we’ll certainly be updating that outlook. It is fair to say though particularly the active safety and high voltage business are running ahead of where we thought they’d be at this time. And as Kevin talked about with the bookings, that looks like it will continue. But we’ll be updating the longer-term numbers mid-year. As it relates to margin rate, I’d really say to our margin and our performance there’s two things: one, the FX and commodity rate impact, the OpEx on the rate has somewhat distorted in 2018 as there are a couple of points of margin. So I do think you got to look through that from the point where we gave the original guidance or the original framework. And we expect that to continue through the first half of ’19. The other thing I mentioned with respect to the operating performance in 2019. We’ve made a decision, and I think this will be short term. This will be a sort of 2019 and certainly the first half of 2019. We’ve made a decision to continue to make investments in things like active safety, mobility, high voltage electrification, even though we’ve seen those volumes pull back a bit particularly in China, right, and our view is as we thought through the year and the longer-term outlooks for the businesses like active safety and high voltage, it didn’t make sense for a couple of quarters of topline pressure in China to pull back on that spend. So that is impacting margins at this point. But again, we think longer term it’s the right thing to do if this is more of a short-term investing through a couple of quarters here as we work through China. Obviously tariffs we’ve talked about, there were unforeseen headwinds on operating performance, but we’re committed to working through those in 2019 as well.

I’ll just Joe’s comment, just as an example, as you know we’ve won seven level two, level three active safety programs that will generate significant revenue in 2020 and beyond. And we feel as though given the technical knowledge that we build in and around perception systems, in and around centralized compute, smart vehicle architecture, there’s a real opportunity over the next year or two to significantly enhance that competitive advantage, and continue to advance those technologies and the net result – the result over the near term has been, on advancing any of those programs we’re winning well north of what our average win rate is for traditional programs, probably closing on 80% or 90% win rate. So in a very rapidly growing market that requires advanced technologies, it’s our view just as Joe said that it’s smart to continue to invest in the engineering capability, even though we’re seeing a near-term decline in vehicle production.

And with that aside, as Kevin mentioned, we’re still very focused on the overhead side of the cost structure. So there’s action been taken now in China to take down some of the indirect salary costs. So our investment willingness to continue to invest is very specific to the high growth product lines and we’re continuing to focus on a lot of the other cost elements you see now.

That’s a great color. And then a quick follow-up, I figured I’d ask you about the US closing the hybrid tax loophole, I assume though there’s no real impact, guiding to a specific tax rate which has been optimized for 2019 and that you are sustainable. But have you specifically looked into it and any impact at all?

Yeah, we have, and there is no impact at this point. So we have taken a look at that and our team has been very active on just the rollout of the US tax law changes, really for the past year now, but that does not have an impact on us.

This is Joe Vruwink for David. Other than the industry volumes being better or worse than the assumptions you walked through earlier, can you discuss some of the more meaningful, be it mix or take rate assumptions within the guidance? Like you mentioned some difficult platform exposure in China during Q1. Any other considerations like that as the year goes on that can swing positive or negative relative to your views?

Listen, I think as we talked about through the balance of 2018 and obviously active safety, high voltage running ahead of expectations, I think that would be a hard equivalent of your take rate comment. And I would say – I think Kevin’s comment on China in Q1, there are some platforms, but we’ve got a couple of OEs that are – it’s more the inventory balancing comment that Dan made. It’s very specific schedules coming out as they sort of work through inventory. So it’s more on the production side than any type of take rate changes in China. It’s very much, they’re not making the vehicle, so it’s not a question of they’re not making them without active safety, they’re not actually making the cars. And to put it into context that display business, part of it is we’re not – we’re letting it wind down. So we stop bidding on it. We are much more focused on sort of a compute platform behind the display than the physical screen itself. That total business is about $200 million in revenue just to put it into context. So it’s a very small product line that’s just going to phase out over time. We called it out this quarter just given it’s probably a $50 million in the quarter or $40 million or $50 million in the quarter. I’m sorry for the year about $20 million for the quarter, so it’s a little bit bigger on a quarterly perspective.

Just a couple of questions. First, kind of more on the longer term, can you tell us more about the potential compute wins? Are those the same or different from multi-domain controllers? If they are similar to multi-domain controllers, are they aiming towards cockpit electronics or safety? And then just what sort of a question I often ask, kind of the pace of discussions around the various flavors of the next gen architecture you outlined, and when those might actually be hitting backlog?

Maybe I’ll answer the last first. So we have one engineering development program on smart vehicle architecture today with a very large global customer, and likely we’ll end up with the second relatively soon. And are in conversations with, I’d say roughly a dozen OEs about that particular activity. So, there are a number of the more advanced technology OEs who are very focused on re-architecting the vehicle and effectively centralizing compute platforms. Our multi-domain controller, yes, they are the same. We’ve won, I guess, 11 multi-domain or central compute platforms, Brian. Of those 11, roughly 7 are in and around ADAS. We have a couple, two or three that are in and around cockpit controllers and then a couple that are really around chassis and powertrain. So we’re seeing a significant trend towards, for consolidation of compute platforms that ultimately in our view arise at the concept that we laid out from a smart vehicle architecture standpoint. There will be a period of time that we’ll go through sort of a process, call it over the next seven or eight years, but ultimately we firmly believe for OEs to build the vehicles that they are looking to build to satisfy customer demand for whether it be vehicle electrification, active safety solutions, or vehicle connectivity, the whole vehicle architecture needs to be rethought. And we feel as though based on our conversations with OEs and feedback from them, we’re at the forefront of helping them rethink that.

And second similar related question, I believe their share in growing harnesses and engineered component connectors has been roughly 35% to 40% and somewhat different competitors in that category. Eventually your win rate on some of the ADAS stuff earlier, what’s been your win rate in electrical? Is it more traditional electrical businesses? Is it increasing or is it kind of the market share is roughly the same, but you might be gravitating towards higher value applications?

And so on the connector engineered component, I would say it’s been high over the last couple of years, part of that is market share gains within auto, part of that is focusing the portfolio outside of auto in areas like commercial vehicle where we’ve been less focused, as well as a real push through some of our acquisitions like Winchester, like KUM trying to grow outside of transportation in total, but within the auto market we’re gaining share there. On the wire side, I would say, we’re growing based on bookings and revenue growth basically at market, maybe a little above.

Yeah Brian, a good example within that SPS segment I mentioned at my prepared remarks. The commercial vehicle business and SPS alone, we were close to 20% growth this year for our signal and power solutions. And that base is getting larger, we’re over $1 billion of revenue, so it’s not necessarily off of a small base anymore. So we’re seeing a lot of uptake from commercial vehicle OEs and our connection systems and our electrical distribution system technology. So I would say that broadly speaking, that business is growing its share. As we’ve often talked about and you mentioned, we estimate that business has content on one out of every three-and-a-half vehicles manufactured globally. So it’s got more market in it, so its growth rate will always be a little lower than, sometimes its lower than, some like an active safety. But that business is taking share.

And then final question more for modeling purposes, can you give us any sense of your China exposure in terms of different types of OEMs? Because, for example, premiums held up much better than the lower end of the mass market, Japanese and Korean versus Japanese joint ventures have held up better than the American one. So can you kind of remind us through the pie chart in terms of your end OEM exposure there for and segment exposure?

For 2018, total 23% of our China business was with what we call domestic OEMs, 90% of that though was concentrated really in the top 10 OEMs. So, it’s a – whereas Aptiv, you know given that active safety, infotainment, electrification, we tend to be with the higher, larger domestic Chinese OEMs. 77% was with the foreign JVs.

And then kind of premium mass market was in that, those JVs?

I don’t have an exact percentage for us. It tends to be – we do that a lot of the higher end in there, the FAW, BW, the SBW, the Audi types of platforms. We can come back here with a more specific number; we can take a look. I don’t have it at the top of my head, I’m sorry.

Want to focus on your active safety business; I think with those 57% revenue growth probably around $900 million. How does that compare from a margin perspective for 2018 relative to corporate average? As the growth continues what type of incremental do you think the business will have on it, and when is that going to be above corporate average in car, materially accretive from a bottom line perspective?

I can start, and Joe can fill in with the specifics. But as we’ve talked about, usually when we introduce technology, the formula typically is getting, call it $300 million, gives you the breakeven, and then beyond that you begin to expand on margins. I’d say, you’re right, we’re above $900 – we’re between $900 and a $1 billion as it relates to revenues. Today those margin rates are roughly at corporate average, and as you head into 2019 and beyond, I’ll expand beyond that. So it’s carrying its full weight from a profitability standpoint.

That’s right. You’re spot on with the $900 million. We finished a little bit over $900 million, and Kevin’s comment is it’s within 50 basis points of corporate average now, and next year we have it moving well north of that. So this business is a meaningful contributor at this point to the profitability and cash flow of the overall company.

But that’s including or excluding the autonomous investments you’re making?

Active safety that would just be excluding, that’s the product line we’re quoting, not the segment.

So then the incremental for this should be probably high 20s, low 30% range going forward on the ADAS side of the business?

Yes, I would say it’s closer to kind of mid-20s as we launch at least early stage some of those level two plus level three programs. That’s a much more advanced solution, especially as you approach level three. So I’d say there’s some incremental engineering that goes in and based on timing of that engineering and revenue recognition or launch of those programs that will be a little heavier engineering.

Dan it’s just the growth in the business right, and I again loved a longer term, but you will see over 40 points of growth next year in active safety will continue, maybe slightly below that, but in a very meaningful way in 2020. So we are continuing to grow the infrastructure of this business, so the incremental I’d say – to Kevin’s point, the mid-20s are probably a better estimate for the next couple of years and you got more to leverage as it gets larger.

So then focusing on the autonomous investments, I think delays we had from you; it was maybe $20-25 and de-target revenue about $500 million. You’ll probably tell me that you’re just going to update it later in June or whatever the Investor Day. But want to understand kind of the confidence level you’re getting there and then if there’s any immaterial impact on your growth prospect for the business by potentially the German OEMs and the supplier having an autonomous consortium put together.

I’d say our level of confidence in the $500 million hasn’t changed. So maybe at the investor day we’ll give a more precise number than the $500 million. With respect to discussions across the OE and supplier universe, those have been going on for quite some time, and quite frankly we’re a part of the number of them. And as we contemplated our revenue outlook at our investment requirement, it was under the contemplation that this is a bit how they – there would be a lot of discussions, this is how things would play out. So we wouldn’t see any impact on that revenue forecast at this point in time and certainly contemplate when we originally estimated the size of the market and our market share.

And lastly for the tariffs, it sounds like a nice job so far going from the $7500 down to $60. You’ve got a couple of more actions coming through with moving of the production lines fine and you’ll through customer validation. Can you share with us the magnitude of what the annualized run rate of those savings would be? I’m not trying to hold you to a timing, but trying to understand how much that would potentially be called a tailwind if it happened at the end of the year and in ’19 and nothing else changed.

Yeah, at this point David, unfortunately we’re just not along, when we had we would have worked or at least commented to it. So a lot of action has been going on. Like I said, we were able to get the low hanging fruit; we’ve already taken care of November and December and now working on some of the bigger projects. Again it’s stuff we are good at doing, we know how to pick up a production line and move it somewhere else, it’s just a matter of timing, with a fair amount of that timing sort of being out of our control. So, at this point we’ve got the $60 million in there and we’ll keep it as running update on how we progress on that through the year.

One of your active safety competitors has commented that automakers have delayed the launch of some new vehicles perhaps to save money and the top tier industry environment pressuring the revenue in 2019, even as the long-term outlook is unchanged or better. Are you just curious what if anything you might be seeing with regard to launch delays? I ask in part because I think this would negatively impact strong backlog stories such as your own, given that new vehicles are likely to have more active content per vehicle in the existing programs. And similar to the conservative industry assumptions you are introducing, I think it would perhaps cast your 2019 revenue guidance even more favorable lines.

Ryan, we haven’t seen any program delays. No delays, no shifting, no cancellations, really in any region. Now we’ve seen in North America and other passenger car volumes, sedan volumes as you know, I mean you follow us closely as we do. Significant reduction in those sorts of vehicle platforms, and they’ve been in and out and they’ve tended to be replaced with whether it’s crossover SUV or truck volumes. But we’ve not seen delays or cancellations of future programs.

We haven't experienced any cancellations in any region. In North America and other markets, there's been a notable decline in passenger car and sedan volumes. You've been following this closely just like we have. These vehicle platforms have fluctuated, often being replaced by crossover SUVs or trucks. However, we have not encountered any delays or cancellations regarding future programs.

I think we have time for one more question.

Well, I just had one follow-up question on China, and Kevin I hate to kind of parse your word like this. But when you were talking about page 8 on China, you mentioned something about getting ready for structurally lower volumes and obviously you’re taking the word for its actions. Just curious as you think about that, in absolute terms is that growth rate and then as you’re kind of thinking about the actions you’re taking on the workforce side in ’15 we saw a sort of whip-sawing scare sort of growth scare there. Is there any concern that you might see similar even though we’re not hearing it yet, coming in any kind of bump stuff up there. And the other note to this though is, that even if we saw slower growth or maybe lower absolute volume growth from a cyclical standpoint here in China, does the content growth story for you just stands so strong that your 10% growth above market maybe just expands and you’re not sort of tethered to this macro that I think we’re all concerned about right now.

Yes, listen what we’re basically saying is, our outlook, we’ve seen three straight quarters of weak production growth and our outlook for the full year based on the schedules we see on unit volume. It is down and I think if you do that math, our number is effectively for 2019 a 26 million unit China, right. Now that’s a huge market. Those are – when you put in perspective with Europe and North America, that’s a massive market. And of the 26 million units, our outlook is you’d have growth but growth would be more tempered than what it has historically been. Having said that, given where we sit from a technology standpoint, our growth over market, we believe will continue to be extremely strong. If that possibly accelerate just given the demand for things like active safety, infotainment, user experience, and vehicle electrification. So although a lower production level, growth over market and pure revenue growth will continue to be extremely strong. So we’re positive about China, we’re positive about where we sit in China. We think you’re going to see lower growth than what we had historically seen over the last 10 years.

Just to add a little context, those three product lines, whereas it relates to China, all three of those are poised for triple-digit growth next for us in China, as we start to go through on a product line basis. So, like our estimates, it’s going to be well over 100% revenue growth.

The workforce actions are, are those sort of a rebalancing and we can expect some other folks to be hired in other areas? Meaning you are tempted, you are kind of going after the workforce, but you’re still seeing growth and trying to understand the balance between those two.

Yes, and that’s the balance. The balances are from a revenue growth standpoint which is a region that’s growing. I think we view this as an opportunity, quite frankly, to tighten the belt, and regardless of whether the market rebounds strongly, I don’t think you’d see us doing any real whip-sawing there. I think you’re just operating off of a lower overhead base.

So listen everyone, thank you very much for taking the time to get an update on our fourth quarter earnings as well as our outlook for 2019. We appreciate your time and we certainly appreciate you as investors. So thank you.